Extra Space Storage Q2 2023 Earnings Call Transcript

Participants

Corporate Executives

• Jeff Norman, Vice President - Investor Relations & Corporate Communications
• Joseph D. Margolis, Chief Executive Officer
• P. Scott Stubbs, Executive Vice President & Chief Financial Officer

Analysts

• Michael Goldsmith, UBS Group AG
• Jeff Spector, Bank of America Merrill Lynch
• Steve Sakwa, Evercore ISI
• Juan Sanabria, BMO Capital Markets
• Todd Thomas, KeyBanc Capital Markets
• Smedes Rose, Citi Investment Research
• Keegan Carl, Wolfe Research
• Ronald Kamdem, Morgan Stanley
• Ki Bin Kim, Truist Financial Co.
• Spenser Allaway, Green Street Advisors
• Jonathan Hughes, Raymond James

Presentation

[Operator]

Thank you for standing by, and welcome to Extra Space Storage Inc.'s Second Quarter 2023 Earnings Call. [Operator Instructions]

I would now like to hand the call over to Jeff Norman, Investor Relations. Please go ahead.

[Jeff Norman, Vice President - Investor Relations & Corporate Communications at Extra Space Storage]

Thank you, Latif. Welcome to Extra Space Storage's second quarter 2023 earnings call. In addition to our press release, we have furnished unaudited supplemental financial information on our website.

Please remember that management's prepared remarks and answers to your questions may contain forward-looking statements as defined in the Private Securities Litigation Reform Act. Actual results could differ materially from those stated or implied by our forward-looking statements due to risks and uncertainties associated with the Company's business. These forward-looking statements are qualified by the cautionary statements contained in the Company's latest filings with the SEC, which we encourage our listeners to review. Forward-looking statements represent management's estimates as of today, August 4th, 2023. The Company assumes no obligation to revise or update any forward-looking statements because of changing market conditions or other circumstances after the date of this conference call.

And I would now like to turn the call over to Joe Margolis, Chief Executive Officer.

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

Thanks, Jeff; and thank you, everyone, for joining today's call. We have had a busy three months and a lot has happened since our first quarter earnings call. Operationally, same-store occupancy remained high through the second quarter. Although rental volume was down year-over-year, vacates also remained muted, allowing us to improve occupancy sequentially each month through the quarter, ending June at a very healthy 94.5%. Existing customer health remained strong with ARRs and bad debt levels remaining low, and customer acceptance of rate increases remained steady.

Our strategy coming into the year was to maintain high occupancy in order to enhance pricing power to new customers as we moved into the leasing season. This strategy was effective through May and we improved rental rates sequentially and started to tighten the year-over-year negative delta and achieved rate growth to new customers. However, new customer rates have not improved meaningfully in June and July, both of which are typically high-volume rental months in a busy leasing season. The miss in same-store revenue in June was offset by lower-than-expected same-store expenses, allowing us to remain on budget for property NOI for the first half of the year.

From an FFO perspective, we also met our internal budgets for the first and second quarter. As we look forward, we expect the impact of lower new customer rates in the summer months to weigh on revenue growth in the back half of the year. Our initial guidance assumed that we would fully close our negative year-over-year new customer rental rate growth gap by July, and that new customer rate growth would be positive through the end of the year. Year-to-date, we have not gained that pricing power, and now believe new customer rate growth will remain negative year-over-year further into 2023. As a result, we have reduced our 2023 same-store revenue expectations. Our lower estimated property revenue, together with a higher forward interest rate curve, also reduced our full-year outlook for core FFO. Needless to say, we are disappointed that rental rate growth to new customers has been weaker this leasing season, and we never liked the idea of having to reduce our outlook.

With that said, we are also careful to maintain perspective about where Extra Space and the storage industry actually sit today. First, occupancy levels remained just below 95%, which excluding the last couple of years, are as high as we have ever seen. Second, new customer rates, while not as strong as last year, remain 15% higher than 2019 pre-pandemic levels. Third, new supply continues to be manageable, and the headwinds to future new development are increasing. And finally, our external growth drivers continue to fire on all cylinders, with 54 additions to our third-party management platform in the quarter, and 102 stores added through two quarters.

On July 20th, we closed our merger with Life Storage, adding over 1,200 stores to our portfolio, which today has over 3,500 stores spanning 43 states. I am proud of both teams, who have worked tirelessly to complete the merger, to create a stronger portfolio, platform and company. We are all focused and working hard to achieve a smooth integration. So far, I am very pleased with how seamlessly the integration is progressing, and how we are already finding ways to create value and unlock synergies.

Let me provide a couple examples. In the two weeks since we closed the transactions, we have onboarded and trained over 2,700 LSI employees, and already transitioned over 900 stores to our point-of-sale system, with the remaining stores to follow next week. This move to our point-of-sales system is critical, because, among other things, this platform platform allows us to implement our digital marketing and pricing strategies, which will allow us to begin to optimize performance at these stores. And second, last week, S&P Global raised our credit rating to a BBB+ to reflect our larger and stronger Company, which will have an immediate and future benefit on our cost of debt capital.

So, while we have just closed and we know it is still early, we are excited as we begin to realize the many future opportunities this merger creates for Extra Space and our shareholders. We will continue to give updates on the integration and performance of the Life Storage assets, as well as our progress towards our $100 million in minimum estimated synergies. After some short-term dilution expected during the remainder of 2023, we believe we will be at least in our underwritten synergy run rate early in 2024, with additional upside beyond as we continue to optimize the performance of the combined Company and capture additional synergies not quantified in the original underwriting. It is still a great time to be in storage and I believe the future of Extra Space remains bright.

I will now turn the time over to Scott.

[P. Scott Stubbs, Executive Vice President & Chief Financial Officer at Extra Space Storage]

Thanks, Joe; and hello, everyone. As Joe mentioned, we had another solid quarter, meeting our internal same-store NOI and FFO projections. The modest miss in property revenue in June was offset by expense savings; and other small beats in interest income, G&A and higher management fees were offset by higher interest expense and lower tenant insurance.

After tightening year-over-year achieved rate to new customers to negative 3% in March, we backed off on rates and averaged approximately negative 8% in April, which immediately drove higher rental volumes. We saw a similar traction in May, but then saw rental volume slow in June and July despite keeping new customer rates down approximately 10% year-over-year.

On the expense front, we are performing well with minimal payroll and property tax growth and marketing expense remaining in line with our expectations. However, we have experienced additional pressure in insurance expense premiums in the property and casualty markets with average premium increases in our June renewal of approximately 50%.

Turning to the balance sheet. We completed a $450 million bond offering in the quarter and completed a recast of our credit facility, bringing revolving capacity to approximately $2 billion, in preparation for the Life Storage merger. We also closed on a term loan of $1 billion with a delayed draw feature that we accessed at closing to pay off Life Storage's line-of-credit, private placement debt and other closing costs.

In last night's earnings release, we updated our 2023 guidance ranges for same-store growth expectations and core FFO, which do not include the impact of the recently closed merger with Life Storage. Given the tight timing between the closing -- between closing the merger on July 20th and yesterday's release, we provided standalone guidance for Extra Space, excluding the impact of the merger, with separate details about the anticipated dilution from the merger in the remainder of 2023. Despite meeting our internal projections for same-store NOI and core FFO, we have reduced our forward-looking estimates, given the lower-than-forecasted pricing power and rental volume experienced in June and July, as well as the upswing in the forward interest rate curve.

Our outlook for same-store revenue growth, which does not include the LSI assets, is now 2.5% to 3.5%. We have also reduced our same-store expense range to 3.5% to 4.5%, due to better-than-expected payroll and property tax resulting in a revised NOI range of 2% to 3.5%. Our expectation remains that the rate of revenue growth deceleration continues to flatten in the back half of the year with easing comparables. Our core FFO range, excluding the impact of the LSI merger, is reduced to $8.15 to $8.35 per share, driven primarily by lower property revenues and higher anticipated interest rates.

For the Life Storage merger, we estimate initial dilution in 2023 as we integrate and optimize the portfolio to capture our anticipated synergies. We estimate $0.10 to $0.15 of dilution per share in 2023 and we believe that we will be at our $100 million run rate in early-2024. Details of the second quarter performance of Life Storage have been provided in our supplemental package, and we will provide updates on the performance of the LSI assets going forward. We continue to believe storage as an asset class is among the most resilient in the REIT space. We believe our operating platform and highly diversified portfolio has become even stronger through the Life Storage merger and that it is positioned for outsized growth.

With that, Latif, let's open it up for questions.

Questions and Answers

[Operator]

[Operator Instructions] Our first question comes from the line of Michael Goldsmith of UBS.

[Michael Goldsmith, Analyst at UBS Group]

Good afternoon. Thanks a lot for taking my questions. It seems like the largest driver of the reduced guidance is that street rates didn't converge with last year, which is weighing on results in the back-half, so two-parter here. One, what was assumed for street rates for the back half of the year? And two, this is expected to weigh on the results in the back half of '23, what is the expected impact from this on 2024 operating metrics?

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

So, I think we see -- the biggest difference we see in the back half of the year, frankly, is the comps get a lot easier. So, we kind of see a continuation of modest growth, but with much easier comps.

Now, what's the second question, Michael?

[Michael Goldsmith, Analyst at UBS Group]

So, you see -- and then the impact on -- the street rates are weighing on the second half of '23. Is there any impact from that onto -- into 2024?

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

So, we are not talking -- we don't have any guidance. I'm not talking about guidance to 2024 yet, but clearly where you end '23 is your -- sorry to give a stupid answer, is a starting point for '24, so that -- that will be the impact.

[Michael Goldsmith, Analyst at UBS Group]

And just to clarify on the first question, like, by growth you mean, you're expecting a slow convergence of '23 street rates to '22 levels and you expect that to converge sometime in the back half? Do you have any visibility like, is that early, is that late, like, just looking forward, so just relative placement there?

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

Yeah, we had thought by June-July, we would have had that conversions point and now we think it's further into 2023.

[Michael Goldsmith, Analyst at UBS Group]

Okay. Got it. And then my second question here is that, given that a majority of the revenue synergies are driven from revenue -- or given that a majority of the entire synergies are driven from revenue, what gives you confidence that you can achieve your $100 million of run rate synergies in early-2024? Thanks.

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

So, on the revenue side, you know, as I mentioned in my comments, we have 900-plus stores on our point-of-sales are Breeze, and the ECRI notices have started going out and we have a very detailed plan customer-by-customer, when did they get their last one, where their rate is, on the street rate, not to overload any store, but that has started and next week we'll have all the rest of the stores on Breeze, and those ECRI notices will go out. And the confidence we have is because we've done this all the time. We take over stores all the time that have rates below where we want them and we send out ECRI notices and we know the acceptance rate and the churn rate, and it gives us a high degree of confidence that's going to work.

On the insurance side, once we're on Breeze, new customers will purchase insurance from our platform, which is at a higher rate than LSI's program was and existing customers won't be converted until January 2024, those notices will go out. And that delay is for both regulatory reasons and notice requirements in the existing LSI contract with their insurance provider.

And then the third biggest kind of segment of the $100 million is the G&A side. And we've now sharpened our pencils, hired who we want to hire, redone budgets department-by-department and have greatly increased confidence we will exceed the underwritten G&A savings.

[Michael Goldsmith, Analyst at UBS Group]

And apologies for keeping on going, but just to clarify on the ECRIs, I think, you said in the script that customers are continuing to absorb them. That said, ECRIs can be highly dependent on the trajectory of street rates. So it is -- or just the trajectory of street rates, is that going to impact your ability to pass along ECRIs in the near-to-intermediate term?

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

So, I don't think that's going to be a significant impact. So, you're right that street rate is a factor in the quantum of the ECRIs that's given. But the gap between the rate at the LSI stores and the rate at the competitive Extra Space stores gives us confidence that there is still plenty of meat on that bone.

[Michael Goldsmith, Analyst at UBS Group]

Got it. Thank you very much.

[Operator]

Thank you. Our next question comes from the line of Jeff Spector of Bank of America.

[Jeff Spector, Analyst at Bank of America Merrill Lynch]

Great. Thank you. First question, I guess, just taking a step back and listening to the comments on what you thought would happen versus what actually happened, to understand and feel comfortable with the new guidance, like, why did you -- what was -- what were the systems telling you, let's say, in the spring or early-summer that you would close the gap to actually what happened? And then compare that to now, what the systems are saying for the rest of the year?

[P. Scott Stubbs, Executive Vice President & Chief Financial Officer at Extra Space Storage]

Yeah, Jeff. So, what we were seeing earlier in the year was, we were seeing our street rates or our achieved rates to new customers steadily moving up and we were seeing that our occupancy gap was maintaining what we were expecting. That was pretty consistent through May. As we moved into June, we found that in order to maintain our occupancy, we needed to lower rates, and that continued into July. And so into July, we were negative 10.5%, whereas in the second quarter, our rates were averaged about 8% negative to new customers. So, just that change in customers being shopping more and being much more rate-sensitive is what caused us to change our outlook going forward.

[Jeff Spector, Analyst at Bank of America Merrill Lynch]

Okay. Thanks. And then, on the rental volume comment, Scott, I think, you said, rental volumes slowed in June and July, obviously. I guess trying to tie that into one of your competitors' comments on record move-ins, I guess, what is the health of the top of the funnel like new customer traffic, like what are we seeing today, let's say, as we started August? And how should we think about that in terms of seasonality as we head into the coming months?

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

So, there's plenty of self-storage customers out there for the larger operators to capture. We're at 94.5% occupied. Obviously, we can keep our stores full. The challenge is, there is not sufficient enough customers to give us pricing power. We can't move rates and maintain that type of occupancy to the level we wanted to. So, our year-over-year rentals were down 9% in the second quarter, so where Life Storage is, for comparison purpose. But vacates were also down by -- though less than that, but a similar number. So, there is customers out there. Our platform can capture them. But we don't have the pricing power we expect.

[P. Scott Stubbs, Executive Vice President & Chief Financial Officer at Extra Space Storage]

And Jeff, maybe where we vary a little bit from some of the other reports that have been out there is, while they may see increases in rentals, some of it could be what happened last year and also what their new rate is moving in. And I think some of them reported a wider gap than what we have even experienced.

[Jeff Spector, Analyst at Bank of America Merrill Lynch]

And then -- I'm sorry, but just one follow-up to Michael's question on the -- I guess, you discussed the easier comps. I think you said into the end of this year. I guess, so can you provide like a specific month or timeframe, and do the easier comps continue into '24?

[P. Scott Stubbs, Executive Vice President & Chief Financial Officer at Extra Space Storage]

Yeah. So the easier comps do continue into '24 as rates moderated in the back half of last year. In terms of our rates to new customers, they continue to moderate it back half of last year and into this year. In addition, you have an easier revenue comp this year than you had from last year. Our revenue growth the first half of 2022 was almost 22%.

[Jeff Spector, Analyst at Bank of America Merrill Lynch]

Thank you.

[P. Scott Stubbs, Executive Vice President & Chief Financial Officer at Extra Space Storage]

Thanks, Jeff.

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

Thanks, Jeff.

[Operator]

Thank you. Our next question comes from the line of Steve Sakwa of Evercore ISI.

[Steve Sakwa, Analyst at Evercore ISI]

Thanks. Yes, good morning. I guess, it seems like the light switch went off in June and July. I'm just curious, can you guys put your finger on what sort of changed customer behavior that much to change the pricing dynamic in June?

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

I don't think we can. We had an odd March, we couldn't figure that out as well. We've talked about that. We were feeling really good at the end of May and there was a distinct change in customer behavior in June and July. And I would be guessing, if I told you I knew what it was.

[Steve Sakwa, Analyst at Evercore ISI]

I mean, do you think it's housing-related, is that maybe just the lack of movement in housing creating more -- less demand than you would have thought?

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

I think housing is certainly a factor, right. That's one important component of demand for self-storage and we all know the housing market story. I think another factor is, consumers don't have as much money in their pocket, right. The savings rate is way down, all the extra COVID dollars that were floating around have gone away. There is inflation in the economy. I think the consumers have fewer dollars as well.

[Steve Sakwa, Analyst at Evercore ISI]

Okay. And, I guess, secondly, if you kind of look at the implied guidance for the second half of the year, if I'm doing my math right, I think the revenue growth is kind of zero to 2%, which compares to the 2.7% you did in the second quarter. So maybe, Scott, just help us think through like what gets you to kind of the upper end of the range and what gets you to the lower end of the range. Is it more occupancy-driven? Is it more the new rates to the customers? Is it slow down in ECRI, like what are the big drivers between kind of the low-end and high-end you're seeing?

[P. Scott Stubbs, Executive Vice President & Chief Financial Officer at Extra Space Storage]

The biggest drivers I think are when we move positive in terms of achieved rates to new customers. And as we mentioned before, we do have an easier comp from last year. But I think that where you fall in that guidance is when those new customer rates move positive and you start to have a little bit of pricing power to new customers.

[Steve Sakwa, Analyst at Evercore ISI]

So, I'm sorry, is there any of that embedded in the guidance for the back half of the year or is it like at the high-end that assumes that and a low-end, it doesn't?

[P. Scott Stubbs, Executive Vice President & Chief Financial Officer at Extra Space Storage]

Yeah. So, the low-end assumes that you don't get pricing power. The high-end assumes that you start to get some of that pricing power. And it's probably more in the back half -- the end of the year where you start to see the benefit of it. Any pricing power you got in August, you might start to see some benefit later in the year. If you don't get pricing power until November-December, you're not going to see anything this year.

[Steve Sakwa, Analyst at Evercore ISI]

Got it. Okay. Thank you. That's it.

[P. Scott Stubbs, Executive Vice President & Chief Financial Officer at Extra Space Storage]

Thanks, Steve.

[Operator]

Thank you. Our next question comes from the line of Juan Sanabria of BMO Capital Markets.

[Juan Sanabria, Analyst at BMO Capital Markets]

Hi. Just a quick follow-up to start on Steve's last question. When you say pricing power, is that you're able to raise street rates sequentially or more just benefiting from easier comps and you won't -- the decline year-over-year will go away?

[P. Scott Stubbs, Executive Vice President & Chief Financial Officer at Extra Space Storage]

It's more the year-over-year comp. We have actually been able to move street rates sequentially as we moved through this year, but the year-over-year comp has made them negative.

[Juan Sanabria, Analyst at BMO Capital Markets]

Okay. And then just a regular way question. Just curious, is there anything by MSA or region that's where you saw softness? Like are the coasts performing better than some of the previously high-flying Sun Belt markets or just curious on any commentary you can provide around that?

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

So, I think it's too much of a generalization to say the Sun Belt is weak and coasts are strong or anything like that, right. Some of our best markets, Orlando, Tampa, Miami, continue to outperform portfolio averages, those are Sun Belt markets. LA continues to be good. And some of the weaker markets, frankly, are markets that put up 30% growth last year. So, they -- it's hard to do that several years in a row, so they appear weaker.

But I think the important thing to remember is, markets will cycle in a non-correlated factor -- non-correlated manner. And because of that, it's important to be as diversified as possible, so you always have some markets that are on the upswing and you always have some markets that maybe are coming off of the upswing. And one of the reasons we like the LSI merger is because it further diversifies our portfolio and reduces our concentration in our top markets.

[Juan Sanabria, Analyst at BMO Capital Markets]

And then just one last one, if I may. Anything on the churn front in terms of length of stay you're seeing being impacted as you've seen in kind of less top-of-funnel demand throughout the system worth noting on the one or two-year length of stay decreasing on a hint to that out?

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

So, the one or two year length of stay has decreased very slightly. We're still in the low-60% on the one-year and 46% or so on the two-year. We -- I think we are losing some of those long-term COVID tenants, but not all of them, but length of stay is still healthy. Our average vacating customer is almost 18 months, their median is about 7.5 months. Those are great numbers as compared to pre-COVID.

[Juan Sanabria, Analyst at BMO Capital Markets]

Thanks, guys. Good luck.

[P. Scott Stubbs, Executive Vice President & Chief Financial Officer at Extra Space Storage]

Thanks, Juan.

[Operator]

Thank you. Our next question comes from the line of Todd Thomas of KeyBanc Capital Markets.

[Todd Thomas, Analyst at KeyBanc Capital Markets]

Hi. Thanks. Appreciate the disclosure on LSI same-store. It looked like revenue and NOI growth decelerated quite a bit more than we would have anticipated. I'm not sure how that compares to what you were anticipating. But it was about 1,000 basis points sequentially during the quarter before the merger closed. Any sense on what happened during the quarter? And can you speak to the integration there and first steps around stabilizing growth in the Life Storage portfolio?

[P. Scott Stubbs, Executive Vice President & Chief Financial Officer at Extra Space Storage]

And maybe I'll speak to the results and Joe can take the integration piece. First of all, they were still managing their properties, so clearly, we couldn't go in and manage them the way we would have liked to. I think that what we saw was, occupancy fell off more than we would have expected and we would attribute that to them keeping rates too high in May and June. When they have lowered them, you've seen it move in a positive direction. The month of July, they finished the month of July around 91%, so it ticked up slightly, but they did not see that busy season bump that we would have expected.

And then in terms of the integration, Joe?

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

So, I spoke a little bit about the systems integration, that's going well and we'll continue to work on that. Data transmission is going well. We still have some work to do there, but no hiccups. People is not something you can just do in a couple of weeks, it will take us a while to fully train the Life Storage managers on our way of doing things, right, they can all take rentals now and do the basics, if you will, but they'll continue to get better and better. And as they do, their performance will improve.

[Todd Thomas, Analyst at KeyBanc Capital Markets]

Okay. Do you expect to continue providing a breakout of the Life Storage same-store portfolio and performance going forward through '24, I guess until it's included in the same-store in '25?

[P. Scott Stubbs, Executive Vice President & Chief Financial Officer at Extra Space Storage]

So, we have not fully determined '24, we think it is likely, because it's probably the best way to show the improvement. If you compare our same-store pool to theirs, you should be able to see them outperforming due to them being on our systems, but I think it's likely, but no final decision yet.

[Todd Thomas, Analyst at KeyBanc Capital Markets]

Okay. And then I had a question around this environment here as it pertains to new supply. We've heard that starts are likely declining and could be materially lower moving forward here in the near-term, which would be good for absorption of existing stores, but as it pertains to the supply added over the last few years, a lot of that product leased up at an accelerated rate during the pandemic from some of the new demand related to the pandemic. Are assets in your system that leased up with a disproportionate amount of, I guess, COVID demand customers or are you seeing more pressure on move-outs or different customer behavior than the stores that you've operated and that were stabilized for a period of time before the pandemic?

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

No, I don't think customers behave differently if they moved into a new store they just opened or whether they moved into a store that's been up and stabilized for a long time, right? They leave some point after their need for storage goes away. I think your thesis is right, right? We see a moderation of new supply, but at the same time, we see markets that had kind of excess COVID demand it's going away to build up new supply, and now that may be moderating creating more availability.

[Todd Thomas, Analyst at KeyBanc Capital Markets]

Right. I guess that's my question. The latter point that you just made. Are the assets over the last several years, a couple of 1,000 stores that were delivered beginning maybe in 2018 or 2019 through 2022, are you seeing those stores either a little bit more challenged or are they even in some markets may be still struggling to find equilibrium in terms of rate as demand moderates and some of those renters move-out?

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

So, I'm sorry if I didn't answer that question clearly. I think, it's an asset-by-asset analysis. Certainly, there are markets that are struggling, because they had a lot of new supply delivered, it all got filled up during COVID. Now there's lesser demand. So, maybe those markets are under a little more pressure. Now I give you, Phoenix is a really good example of that.

But I think it's a market analysis, not an asset analysis. It's not like all the excess COVID demand customers moved into the new property and the other -- all the regular customers moved into the existing properties, so the new properties are struggling more. The customers go everywhere and the markets perform similarly. I hope that makes sense. Yeah, Todd, you're probably seeing it a little bit more in rate than you are occupancy. We have been able to maintain the occupancy at those newer stores, but you have -- the ability to push rates has not been there.

[Todd Thomas, Analyst at KeyBanc Capital Markets]

Okay. Got it. Thank you.

[P. Scott Stubbs, Executive Vice President & Chief Financial Officer at Extra Space Storage]

Thanks, Todd.

[Operator]

Thank you. Our next question comes from the line of Smedes Rose of Citi.

[Smedes Rose, Analyst at Citi Investment Research]

Hi. Thanks. I just wanted to ask you the implied guidance through the back half of your same-store portfolio, is that sort of a similar guideline for what you're seeing for the LSI portfolio as well or could you -- is it something meaningfully different?

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

We would expect the LSI portfolio to do better as we get their stores on our platform. That uplift begin to occur.

[Smedes Rose, Analyst at Citi Investment Research]

Okay. So embedded in your dilution is better same-store NOI for that portfolio through the back half of the year offset the some of the things that you've called out?

[P. Scott Stubbs, Executive Vice President & Chief Financial Officer at Extra Space Storage]

So, there is some growth there, but not significant. Typically, what happens, as you bring things on to our portfolio is it takes a month or two as you bring things on. And so, not a significant amount of increase, but we would expect those stores to start to benefit from the ECRI.

[Smedes Rose, Analyst at Citi Investment Research]

Okay. And then I just wanted to ask you on your third-party management platform; and maybe it's too soon. But I know that the economics are different for the LSI tenants. And I'm just wondering if you would expect most of them to come on board even though you're, I think you take a higher share or do you think some will leave or kind of what's embedded into your outlook on that side?

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

Yeah, I think that's a good description. So, we've talked to all of the managed owners that have LSI managing their stores. And our expectation is that everyone will migrate to our economics, which are significantly better than other size economics, and also our kind of service levels. We run one program, everyone's on the same program. LSI being more of a customized program for their managed partners, and we will absolutely separate with some of those managed partners who don't want to work on our system, and that's fine, because our goal is not to have the most stores, but to have an efficient profitable management program that works well for both parties. So, we'll continue to -- we'll keep most, I think, and lose many, I think as you said, but I'm very confident we'll continue to grow our management platform faster than anyone else in the industry.

[P. Scott Stubbs, Executive Vice President & Chief Financial Officer at Extra Space Storage]

Hey, Smedes, one other point I would make there is, I think there has been some narrative that we are going to lose some of these customers and Life Storage actually added 17 stores during the quarter. So, they've continued to add to their management portfolio through Q2.

[Smedes Rose, Analyst at Citi Investment Research]

Okay. Thank you.

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

Sure.

[P. Scott Stubbs, Executive Vice President & Chief Financial Officer at Extra Space Storage]

Thanks, Smedes.

[Operator]

Thank you. Our next question comes from the line of Keegan Carl of Wolfe Research.

[Keegan Carl, Analyst at Wolfe Research]

Yeah. Thanks for the time, guys. So, maybe big picture here. I was just wondering if you could walk us through your view on the strategy to cut street rate around this time last year. One, do you think the strategy works? Two, what's the plan for here? Because, it seems that it's had a lot of ripple effects throughout the space, it's created a more challenging operating environment for everyone.

[P. Scott Stubbs, Executive Vice President & Chief Financial Officer at Extra Space Storage]

I'm not sure we have that kind of power, first of all, to create that kind of environment. I think we typically react or based on the data that we're reviewing to maintain the occupancy and maintain the pricing power in terms of our existing customer rate increases. So, if you look at big picture, I think, we were probably one of the earlier ones to move on rate. And I think everyone else eventually -- we'd like to have the hubris to think they copied us, but I think they probably saw the same thing in the data that we saw and they moved on rates also to maintain occupancy.

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

I would also say that, we don't guess at these strategies, we test them pretty vigorously before we implement them and keep control groups, so we know whether we're doing the right thing or if the situation changed. So, because of that I have a high degree of confidence we executed the right strategy.

[Keegan Carl, Analyst at Wolfe Research]

Okay. And shifting gears here at NAREIT. I remember you guys mentioned that marketing spend was up materially in May and you weren't seeing the same results. So, one, is it fair to assume that since you weren't seeing the results you wanted that you drastically reduced that in June? And then, just curious how it translated in July and how you're thinking about marketing spend in the back half of the year.

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

Yeah, good memory. So, we did run some tests during that time period with significantly higher marketing expense, and we didn't see the return on those dollars spent, so we pulled back. And we'll continue to test as we always do and what situations can we get any acceptable return on incremental marketing dollars and whenever that's the case, we're happy to spend on. And if we can't get that return, we're not going to spend money for no reason at all.

[Keegan Carl, Analyst at Wolfe Research]

Great. Thanks for the time, guys.

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

Thank you.

[Operator]

Thank you. Our next question comes from the line of Ronald Kamdem of Morgan Stanley.

[Ronald Kamdem, Analyst at Morgan Stanley]

Hey, thanks so much. Just two quick ones from me. So, back to the question on sort of the top-of-the-funnel demand. I think you talked about sort of things changing in June and July, where you can maintain occupancy but not sort of pricing power. So, when I tie that into sort of the guidance ranges for the back half of the year on the same-store revenue, how do we think about sort of the conviction for the potential upside and downside as you go into the back half of the year on the revenue front? So what I mean by that is, do you sort of need to see trends stabilize or get better in the next sort of two to three months to get there or what sort of baked into that? Thanks.

[P. Scott Stubbs, Executive Vice President & Chief Financial Officer at Extra Space Storage]

Yeah. So, I think what we've seen early in the summer and in July is that there is demand. You just can't get the occupancy and the rate. As we move throughout this year, we have easier comparables from last year. And so, that's where it gives us the confidence to be able to go with the numbers that we've done -- that we've gone with, we think that it gets easier as we move through this year in terms of new customer rates. And so, that's why we're confident. And again, as we mentioned before, where you are in that range is going to depend somewhat on how quickly we get some pricing power.

[Ronald Kamdem, Analyst at Morgan Stanley]

Right. And I guess my follow-up -- follow-up question I have is just because I think the guidance range is 0% to 2%. The heart of my question was like is there a conviction that you can't go negative at some point or is that just -- things just don't move that quickly, that's -- I'm just trying to figure out like rate of change here.

[P. Scott Stubbs, Executive Vice President & Chief Financial Officer at Extra Space Storage]

So, if you look at the lower end of the guidance, I think, it does imply that you could tick negative for a period of time in the back half of the year.

[Ronald Kamdem, Analyst at Morgan Stanley]

Got it. That's helpful. Last one, just on LSI, yeah, we noticed the occupancy dip as well and I think you explained that they cap maybe pricing higher. I just want to go back to the synergies guidance, because initially, I think it was $60 million revenues, $40 million expenses. And you reiterated sort of, has that mix changed at all or is it more or is it sort of still the same? Because presumably the outlook for revenues have sort of shifted a little bit? Just trying to understand, is that $100 million still the same mix or has that moved around a little bit. Thanks.

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

Yeah, it's a good question. Thank you. So, we had -- initially had four components of underwritten synergies. We had G&A. We had reduced marketing spend. We had increased store revenue. And we had tenant insurance. Tenant insurance has stayed about the same. We feel better about G&A, that will do better than that component. The marketing piece, we will not achieve. We -- since we did the underwriting, we have decided on pursuing a dual-brand strategy, which we can discuss, if you like. But the marketing savings was presumed to be under one brand, but we think that the revenue increase, the rental increase and revenue increase from two brands will more than offset the $50 million underwritten marketing savings and we'll also save about $70 million or so of rebranding costs. So, better in G&A, won't achieve the marketing savings, about the same in tenant insurance, and better at the property level.

[Ronald Kamdem, Analyst at Morgan Stanley]

Super-helpful. I think I'll follow up offline, just to make sure I got that, but that's it from me. Thanks so much.

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

Thanks, Ron.

[Operator]

Thank you. Our next question comes from the line of Ki Bin Kim of Truist.

[Ki Bin Kim, Analyst at Truist Financial]

Thank you. Just going back to the LSI topic. This year you're guiding towards $0.10 to $0.15 of dilution. I'm just curious, how should we think about that turning -- like, how should we think about that improving into next year just given the size of the portfolio? I think it's going to be helpful for people to understand the earnings run rate from here on out.

[P. Scott Stubbs, Executive Vice President & Chief Financial Officer at Extra Space Storage]

Yeah. When we announced the deal, we said that it would be just under 1% accretive, and that assumed the $400 million in synergies. So, assuming we hit the run rate early next year, clearly, it shouldn't be dilutive next year and you should start achieving a portion of that 1% accretion. Now, as Joe mentioned, some of these I think will hit earlier than others. I think G&A will start achieving some of that this year immediately. The marketing we -- at marketing, the revenue increases will start to achieve as we send out rate increases, you can't send them all out at day-one. Some of these tenants received a rate increase a month ago. And then the last one is the tenant insurance and that should be effective January 1.

[Ki Bin Kim, Analyst at Truist Financial]

Okay.

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

And we -- sorry, on top of you, Scott, but we've also achieved non-underwritten synergies. We've got our rating upgrade, which will immediately save us on interest expenses this year and obviously on any future borrowings. We sold warehouse anywhere to that management team at closing, which takes that loss off the books and lots of other smaller things that were not in our $100 million that we're starting to achieve.

[Ki Bin Kim, Analyst at Truist Financial]

Okay. And earlier in the call you mentioned that street rates are 15% higher than 2019 levels. And when I look at the cumulative same-store revenue growth that you've achieved since 2019 is closer to 30%, obviously not purely apples-to-apples, but I'm just trying to get a sense of, if street rates are up 15% since '19 and revenue is up 30%, is there further risk of revenues, I guess getting closer to that 15% mark?

[P. Scott Stubbs, Executive Vice President & Chief Financial Officer at Extra Space Storage]

So, your difference between those two numbers is your existing customer rates are more than that 15% and that's what's created the negative churn gap that we have today.

[Ki Bin Kim, Analyst at Truist Financial]

Okay. Got it. All right. Thank you.

[P. Scott Stubbs, Executive Vice President & Chief Financial Officer at Extra Space Storage]

Thank you, Bin.

[Operator]

Thank you. Our next question comes from the line of Spenser Allaway of Green Street.

[Spenser Allaway, Analyst at Green Street Advisors]

Thank you. Apologies if I missed this, but have you guys quantified the magnitude of ECRIs and standalone LSI portfolio in EXR for 2Q and then through July?

[P. Scott Stubbs, Executive Vice President & Chief Financial Officer at Extra Space Storage]

So, we have not quantified the LSI ECRIs, other than the fact that we've said with the synergies, there is $50 million that has to do with ECRIs, as well as potential occupancy upside. When we did the initial underwriting and the initial deck that went out with the acquisition, we showed two studies that we had done that showed a pretty significant gap between rate per square foot on their stores and our stores. And we did not assume that we closed that gap 100%, we assumed that we only closed about a-third of that gap.

[Spenser Allaway, Analyst at Green Street Advisors]

Okay. I'm sorry, did you quantify it for ECRIs [Phonetic] portfolio?

[P. Scott Stubbs, Executive Vice President & Chief Financial Officer at Extra Space Storage]

We did not quantify anything in terms of the back half or 2Q in terms of ECRI.

[Spenser Allaway, Analyst at Green Street Advisors]

Okay. Okay. And then, I know you guys have spent a lot of time on this call, and thank you just providing color around the potential uplift you expect on operations from the LSI portfolio, but are there any concerns as it relates to the NOI kind of operating margin that you guys kind of hope to achieve with this integration, just as we started to see some material weakness in some of LSI's smaller secondary markets? Or said differently, are there any like structural or demographic headwinds in those markets that you think that maybe your scale or superior revenue management platform won't be able to overcome in the near-term?

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

So, it's a good question. I think we really look at this on a long-term basis. And are there going to be some markets that we adopted from LSI? We weren't in Buffalo. How is Buffalo going to do? I'm not sure. Over the short-term, they would be weaker, and some will be stronger, sure. But what is really important is the increased diversification and to have greater variability in where all the cash flows come from is just going to help take volatility out of returns. So, yeah, some markets will do better, some markets will be worse. Market cycle through performance, but over the long-term, it's going to be a benefit to the Company.

[Spenser Allaway, Analyst at Green Street Advisors]

Okay. Thanks so much.

[P. Scott Stubbs, Executive Vice President & Chief Financial Officer at Extra Space Storage]

Sure.

[Operator]

Thank you. Our next question comes from the line of Jonathan Hughes of Raymond James.

[Jonathan Hughes, Analyst at Raymond James]

Hey, good afternoon. So, normally we see street rates are I think really only impacted by new supply, but deliveries have been pretty muted for the past few years. And I know you said in Keegan's question earlier that, you don't think your strategy implemented a year ago impacted the industry. But the Extra Space brand is the second largest out there. So my question is, will you take a bit more of an introspective look and maybe be a little more careful about running these types of strategies in the future? Because, I do think some of your peers, certainly smaller ones, might agree that the seeming price war we have today started a year ago, which did coincide with the strategy change.

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

So, I think it's important to remember that even though Public and Extra Space and Cube and Life are the largest brands, it's still a highly fragmented industry, and we don't control these markets in any respect. We have many, many stores where most or all of our competitors are mom-and-pops and not REIT. So, we only have one or two REIT competitors. So, we're going to continue to adopt strategies that we think produced the best long-term results for our shareholders and not really care about what it does to others.

[Jonathan Hughes, Analyst at Raymond James]

But if the -- I understand the fragmented nature of the market, but I think if you look at maybe the comparable product and Extra Space property is I think different than, say, the Gen 1 drive-up mom-and-pops. So if that's your target consumer and they want your product that's multi-storey air-conditioned, they don't want that legacy property, your share of that market is much greater. And so I think maybe that's where some of my line of questioning came from that overall in the industry basis, yes. I think the Extra Space brand that we all know the concentration, but I think on the actual like-for-like type of products competing for that type of customer, I do think you are a little more sway than you think so. That's my question.

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

I would respectfully disagree. I think our private competitors are not all Gen 1, older, there's plenty of sophisticated private regional operators that have new store, climate control that are very comparable to our stores, their systems and their operating platforms aren't comparable to us at all. But from a tenant standpoint, the product is the same.

[Jonathan Hughes, Analyst at Raymond James]

Okay. All right. Well, that's it from me. Appreciate it. And happy early birthday, Scott.

[P. Scott Stubbs, Executive Vice President & Chief Financial Officer at Extra Space Storage]

Thanks, Jonathan.

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

Thank you, Jonathan.

[Operator]

Thank you. Our next question comes from Juan Sanabria of BMO Capital Markets.

[Juan Sanabria, Analyst at BMO Capital Markets]

Hi. Thanks for the time. Just a couple of quick follow-ups. Firstly, is there any update on Storage Express and how that transition is going and the rollout of the strategy?

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

Yeah. So, Storage Express was a little harder, frankly, to put onto our systems than Life Storage, because we had to put it on the system in a different operating model that we hadn't had programmed. But once they got onto our system, everything is working very well. And one of the reasons we're confident with the ECRI program for Life Storage is, we just went through that ECRI program for Storage Express, and we saw how their customers accepted it.

So, in terms of integration, very well. Operating to six months of the year ahead of underwriting, which is good. Growth is a little slower than we underwrote as we scale that fact while we were focused on the LSI merger. So, we bought five or we've approved for purchase five remote stores, less than $30 million of smaller stores, $130 a foot, but 7% yield in the first year. So, once we can turn our full attention to growing this, we're excited about it. So, summary would be everything on track or ahead of track, going well, just slower growth than we thought as we turned our attention to integrating Life Storage.

[Juan Sanabria, Analyst at BMO Capital Markets]

And just one last question from me. And I appreciate you guys are focused on maximizing revenue. But a lot of the conversation today has seemed to have talked about occupancy and maintaining occupancy and the importance of that. So, I was just hoping you could square the two. I mean, is there a chance that maybe you're kind of hooked on the higher occupancy? I mean, I know that's not the most elegant way to phrase it, but just would appreciate your thoughts there.

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

Yeah. So, as I mentioned earlier, our strategies are based on results of testing that we do. And our results of those tests let us to have a strong conviction that we want to have incrementally higher occupancies. We want to seek the longer term customers and both of those things come at the expense of initial rate and try to make that up through ECRI. So, apologize if we have spoken too much about occupancy, but it is a tool to maximize revenue.

[Juan Sanabria, Analyst at BMO Capital Markets]

Thank you.

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

Thanks.

[Operator]

Thank you. I would now like to turn the conference back to Joe Margolis for closing remarks. Sir?

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

Great. Thank you, everyone, for your time today. I want to emphasize and assure everyone that everyone here at our combined teams is very focused not only on integrating the companies, but maximizing performance at our stores as difficult time we are very, very excited about the future. We see a lot of tailwinds in 2024 as beyond as the underwritten and non-underwritten synergies from LSI hit the books, given the moderating delivery of new stores, given that we have $0.23 of dilution from lease-up stores that will come to the bottom-line. That -- eventually interest rates will be lower. Eventually the housing market will recover, and we will continue to grow our ancillary management bridge loan and insurance businesses. Thank you very much.

[Operator]

[Operator Closing Remarks]